Unusual Options Activity In eBay $EBAY
Unusual Options Activity In eBay $EBAY
As many of you know, unusual options activity can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason… Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week…
eBay $EBAY is the most popular online auction site in the US. The company also owns PayPal, a widely used online payment site. Check here for more info on the company.
eBay is up 3% on the year so far. The current share price of $57.93 is just 5% from the 52-week high of $60.93 and 25% above the 52-week low of $46.34.
So what does unusual options activity in $EBAY tell us?
$EBAY has been a hot stock this year ever since the company announced plans to spin off its PayPal business. In fact, the company may split into three different units. The planned carve out could really help unlock value and give a big boost to the overall valuation of the businesses.
Here’s the deal…
Last week, a complex debit spread traded in $EBAY which suggests big upside could be ahead. Keep in mind, a debit spread is any spread where a cash outlay occurs.
The trade basically occurred in two parts. First, there was an October 62.50/70 call spread purchased. That means the trader bought the 62.50 strike and sold the 70 strike. The second part of the trade involved selling the 52.50 puts, also in October.
Each leg of the trade was executed 10,000 times. The total cost of the trade is $0.40, which is the max loss of the trade unless the stock takes a serious nosedive before October (below the short put strike).
The trade is likely betting on upside from the PayPal spinoff. Max gain occurs at $70 or above on October expiration, with the payoff coming in at over $7 million. Essentially, the trade is a bullish call spread, with the puts being sold to reduce the cost of the long spread.
Here’s the chart of eBay:
As you can see from the chart, eBay has had a good run lately, but has very recently turned back towards the 50-day moving average. However, this trade is a longer term bet that the stock will reach well above recent highs.
A trade like this is often called a risk reversal. It’s generally used by institutional traders as there is major risk on the downside. However, done properly, it’s an excellent way to make a directional bet on a stock while significantly reducing costs.
An easy way to mostly replicate this trade is by doing straight bullish call spreads. You can do a narrower or earlier month spread to reduce costs. Selling the puts against the spread is only something I’d recommend for advanced traders.
Overall, the bullish bet makes good sense. eBay is likely to get a substantial boost from the PayPal spinoff at some point this year. And, knowing a spinoff is going to occur should cap the downside.
More Options Trading Ideas…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
Yours in Profit,
Gordon Lewis
Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.
Category: Unusual Options Trading Activity
